No one likes to lose money, but years of negative stock returns are inevitable. And while you probably can’t get around bear markets completely, you can avoid losing money by doing these five things.
1. Set realistic expectations
When investing, your expectations of what you could earn should be realistic. And sometimes measures like average rates of return can be misleading.
For example, if you invested in large cap stocks between 1926 and 2020, you would have gotten an average rate of return of 10.2%. And if you earned that 30-year rate of return, $ 100,000 invested would have risen to $ 1.84 million.
But over that same time period, you would have gained a high of 54% in 1933 and a low return of -43% in 1931. If you invested for the first time in a year of losses, it could make you be afraid to invest. .
Understanding that your returns will not be linear, but rather an average of positive, negative, and flat returns is important. And understanding this can help you weather the bad years.
2. Know the difference between realized and unrealized loss
When you look at your account balance and see that it is lower than the previous month, you may feel like you’ve lost money. But the numbers you see on your statement or when you log into your account are called unrealized gains or losses. These numbers change for better or for worse throughout a day of market activity and only count as real gains or losses when you realize them by selling your holdings.
For example, if your account balance was $ 10,000 last month and you suffered losses this month, it might now be worth $ 9,000. But you would only actually lose money if you sold that investment before it returned to its original value. Over the long term, the stock market has always appreciated in value, and your investments should as well as long as you stay invested.
3. Have an appropriate time horizon
How quickly you need your money could impact how you keep your money invested during stock market crashes. If you don’t need your money for 25 years and experience a 30% loss, you can ignore that the value of your account could return to that value in a few years. But if you plan to use that money next year, you might freak out about losing any.
Before investing a dime, think about your time horizon. And the closer it is, the more careful you should invest. Without the threat of missing your goal hovering over your head, losses may not seem so devastating and you will be less likely to abandon your investments due to a short-term downturn.
4. Control your emotions
Controlling your emotions is no easy task, and when you lose money you can feel like it will last forever. But the declines never lasted forever. Learning to control your emotions when you feel this way can be the difference between experiencing below average returns that delay or keeping pace with benchmarks.
When you feel like the sky is falling and there is no end in sight, revisiting the stock corrections of the past can help. Even during some of the most extreme loss periods, investors who stayed the course often recouped their losses within a few years. From 2000 to 2002, if you had only invested in large cap stocks, you would have lost about 38% in total. If you had $ 100,000 it would have gone down to around $ 62,000. But in 2006, you would have won back all your money and be slightly ahead.
5. Invest according to your risk appetite
What do you think of volatility? Do you barely notice it and realize that it is a normal part of a market cycle? Or does your stomach fall every time this happens?
You can earn more in the long run if you have more aggressive investments, but in a year of losses these types of investments could also lose more money. And if the losses seem too great, these investments may be too risky for you.
If this happens, it can be more difficult to stay invested. Making sure you invest within your tolerance for risk can help you avoid this. You should also find an asset allocation model that matches your risk appetite, even if it produces a lower average rate of return.
Investing should help you achieve your goals rather than straying from them. While the value of your account steadily increases or decreases is normal, you don’t have to lose money. And controlling your fears, making sure you’re holding the right investments, having realistic expectations about how your accounts will grow and when those gains will occur can help you avoid it.